WHAT IS LITECOIN: Here's What You Need To Know About The Digital Currency Growing Faster Than Bitcoin

Rob Wile

Wednesday

Nov 27, 2013 at 12:01 AMNov 27, 2013 at 2:32 PM

Editor's note: We originally ran this piece Nov. 25. Since then, the price of Litecoin has skyrocketed approximately 400% to more than $25. We've updated it to reflect price changes.

At more than $900, the price of Bitcoin is now so great that it threatens to shut out some mainstream users.

You may be wondering whether there were ever any mainstream users in the first place. But Charlie Lee, a former Googler and MIT grad, recognized such an audience did exist. In 2011, two years after the birth of Bitcoin, the former Googler and MIT grad decided to create a version of Bitcoin that would make it more accessible.

He called it Litecoin.

"I think Satoshi [Nakamoto, Bitcoin's pseudonymous creator] is great, and Bitcoin is awesome," Lee said in a recent interview with BI. "I didn't fix Bitcoin. I just made small changes that made [Litecoin] a little bit better."

Litecoin is not the only digital currency to have mounted Bitcoin’s virtual coattails. Coinmarketcap lists about two-dozen ones who’ve seen their prices increase in the past few months. But Litecoin appears to be the first among these secondary equals, something reflected in its $670 million market cap — nearly 8x greater than the next largest currency, Peercoin.

If you're at all familiar with Litecoin, you've probably heard it described, by Lee or others, as "silver to Bitcoin's gold." But if you don't believe Bitcoin is worth much in the first place, that may mean nothing to you. So we asked Lee to elaborate, and he made a convincing case for where Litecoin will fit into the for-now expanding realm of digital currency.

"It's more abundant, and more lightweight" than Bitcoin, he says.

Here's what that means. Only 21 million Bitcoin will ever get created, and it's projected that won't occur until 2040. Although in theory this has no practical effect on its value if the Bitcoin economy truly takes off thanks to demand remaining consistent, that fixed amount will help keep prices elevated.

Lee designed Litecoin so that 84 million units would be created. And if the Litecoin economy scales up to where Bitcoin evangelists insist Bitcoin should be, the same pseudo-scarcity effect could someday be seen in Litecoin prices.

In addition, Litecoin is not subject to the “arms race” currently seen among Bitcoin miners looking to corner the market on acquiring large amounts of Bitcoin. Bitcoin is built around hash cryptography that is supposed to get more complex — and thus require more expensive computing power to mine — as the Bitcoin economy expands and grows in value. But this has allowed individuals with more efficient computer chips — in other words, ones that require less electricity power to mine a given amount of Bitcoin — to get the jump on more conventional miners. Litecoin eliminates that advantage by using an entirely different cryptography program, called Scrypt, where the limiting factor is memory, not processing efficiency. That means you'd have to buy a greater quantity of computer hardware to beat the program, not just design a better chip.

“There will be less of a cartel of miners,” Lee says.

Finally, Lee says Litecoin transactions enjoy faster "confirmation" times. For a Bitcoin transaction to be completely processed, it must receive a number of confirmations from other users who've located the transfer on the Bitcoin's master ledger, the Blockchain. This usually takes about 10 minutes. That doesn't mean you have to wait around at a cash register if you're using Bitcoin to pay for groceries, as we have documented. But those transactions depend on temporary confirmations.

With Litecoin, Lee says, confirmations take just two-and-a-half minutes. So although the odds of a temporary confirmation not being confirmed on the Blockchain are minuscule, Litecoin eliminates the problem entirely.

So maybe it's better to understand Litecoin as "silver" in the medieval sense of the word: designed to be carried around in your virtual pocket for daily transactions. "If Litecoin truly succeeds, people will be using it for everyday purchases, and Bitcoin for large purposes," Lee says.

Digital currency users appear to have grasped Litecoin's utility relatively swiftly. It's now worth more than $25, a 400% gain in just a week.

Lee estimates Litecoin is about two years behind in both price and adoption. Right now the online retail outlets taking Litecoin are somewhat limited, though will surely grow with the price of Litecoin. But, he says, Bitcoin itself is still decades away from reaching its full potential.

"It's still in an inflationary stage," he says. "Once that stops, in 2040, that's when that's when things get interesting."

See Also:

There Are Dozens Of Digital Currencies That Are All Going Insane Right NowYou Think Bitcoin Is On A Tear? Check Out How Much Litecoin Is Up In Just The Last WeekThere Is A 'Very Surprising' Connection Between Bitcoin's Creator And The Alleged Founder Of The Silk Road

SEE ALSO: There May Be A Connection Between The Inventor Of Bitcoin And The Guy Allegedly Behind The Silk Road

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